Corporations & Shareholders
The Energy Improvement and Extension Act of 2008, P.L. 110-343, added Sec. 6045B to the Code. This section requires an issuer of a specified security to report certain information to the IRS and to its shareholders following an organizational action that affects the basis of a specified security. Sec. 6045B was enacted along with the cost-basis reporting rules under Sec. 6045 that require brokers to report the adjusted basis in securities to the investors. The purpose of both provisions is to improve tax compliance regarding the proper determination of the basis of securities held by taxpayers.
The reporting requirements of Sec. 6045B first applied to organizational actions on or after Jan. 1, 2011. In January 2012, the IRS issued the final version of Form 8937, Report of Organizational Actions Affecting Basis of Securities, for this purpose. The two key terms that establish the scope of the reporting requirement are “specified security” and “organizational action.”
Note: Because Form 8937 was released only a few days before its Jan. 17 due date, the IRS has announced it will not impose penalties for reporting incorrect information on issuers who are required to file Form 8937 and furnish statements to shareholders under Sec. 6045B, provided they make good-faith efforts to post Form 8937 (or the required information) on their website or file accurate Forms 8937 and furnish corresponding issuer statements (Notice 2012-11).
A specified security under Sec. 6045B is any share of stock in an entity classified as a corporation, whether foreign or domestic (or any interest treated as stock, including an American depositary receipt). For this purpose, a security classified as stock by the issuer is treated as stock. Accordingly, the reporting requirement does not apply to entities classified as partnerships for federal income tax purposes or to securities other than stock. The requirement to file Form 8937 applies to both domestic and foreign issuers of securities if the security is owned by U.S. taxpayers.
Notwithstanding the potentially broad scope of this definition, the regulations clarify that an issuer is not required to provide information to any person who would be an exempt recipient under other information-reporting rules. Thus, an issuer is not required to provide a statement to an organization that is tax-exempt. Similarly, a statement is not required to be provided to a corporation, the U.S. government, a state, a foreign government, a foreign central bank of issue, a registered dealer in securities or commodities, a registered futures commission merchant, a real estate investment trust under Sec. 856, an entity registered under the Investment Company Act of 1940, a common trust fund, or a financial institution (Regs. Secs. 1.6045B-1(b)(5) and 1.6045-1(c)(3)(i)(B)).
Identification of an organizational action is crucial, because only organizational actions that affect the basis of all holders of a security or class of a security fall under the Sec. 6045B reporting requirements. Typical organizational actions subject to the reporting requirement include a nontaxable stock split or stock dividend and a distribution of money or other property in excess of current and accumulated earnings and profits. However, for other transactions, the scope of the reporting requirements is not clear.
For example, in two notices providing interim guidance under Sec. 6045B (Notices 2011-18 and 2012-11), the IRS identified a “merger” and an “acquisition” as examples of organizational actions giving rise to the reporting requirement, without any indication whether both tax-free and taxable transactions must be reported. Moreover, inasmuch as these transactions may involve two or more corporations, the IRS has not clarified which of the corporations is the “issuer,” responsible for reporting the effects of the transaction on stock basis.
The available guidance is also not clear regarding the reporting requirements applicable to a corporation’s redemption of its own stock. A distribution of property by a corporation in redemption of its own stock generally is treated as a payment in exchange for the stock if any one of the requirements of Sec. 302(b) is satisfied. Otherwise, the redemption is treated as a distribution subject to Sec. 301 and is treated as a dividend to the extent of available earnings and profits. In either case, whether the redemption distribution is treated as a taxable sale or exchange of the stock or a Sec. 301 distribution, the Form 8937 instructions suggest that it is not subject to Sec. 6045B reporting. Taxpayers are instructed to report an organizational action only when it affects the basis of all holders of a security or all holders of a class of the security. Although the redemption distribution is an organizational action, it does not affect all outstanding shares of stock or all of the shares of a single class. Thus, unless the redemption is completely pro rata, Sec. 6045B would appear not to apply.
The final Sec. 6045B regulations partially address the treatment of a distribution of property where the issuing corporation does not know how much of the distribution will be treated as a taxable dividend and how much of that distribution will be treated as a recovery of basis under Sec. 301(c)(2). Although other types of corporations may also make such distributions, real estate investment trusts and corporations investing in real estate often have cash flow that exceeds taxable income and available earnings and profits because of significant depreciation expense. Distributions from such entities frequently have a return-of-capital component that reduces stock basis, and therefore such distributions constitute an organizational action under Sec. 6045B.
Regs. Sec. 1.6045B-1(a)(2)(ii) provides that an issuer may make reasonable assumptions about facts necessary to estimate the quantitative effect of an organizational action on basis by the reporting due date. However, for this purpose, an issuer must treat a payment that may be a dividend consistently with its treatment of the payment under Sec. 6042(b)(3) and Regs. Sec. 1.6042-3(c). Under these rules, for purposes of furnishing Forms 1099-DIV, Dividends and Distributions, to report the taxable (dividend) portion of the distribution, a corporation is required to treat the entire distribution as a taxable dividend unless it can establish the amount that is not a dividend. If the entire amount of a distribution is reported as a taxable dividend, Sec. 6045B reporting should not be required. If the corporation later determines that a portion of the distribution is not a dividend, it should amend its Forms 1099-DIV and provide the Sec. 6045B information promptly after the final determination of taxability is made (Regs. Sec. 1.6045B-1(g), Example 2(iii)).
In some cases, a corporation may believe that a portion of a distribution is not a taxable dividend but might not know the amount with certainty. In these cases, it may be necessary to make a timely filing under Sec. 6045B and amend it later when the correct information is available. In these cases, in determining the quantitative effect of the organizational action, an issuer may make reasonable assumptions about facts that cannot be determined before the due date. An issuer must file a corrected return within 45 days of determining facts that result in a different quantitative effect on basis from what the issuer previously reported.
Regulations issued under the authority of Sec. 6045B provide that S corporations are deemed to satisfy the Sec. 6045B requirements if the information required under that provision is included in Schedules K-1, Shareholder’s Share of Income, Deductions, Credits, etc., that are filed with the IRS and provided to shareholders on a timely basis (Regs. Sec. 1.6045B-1(c)). An S corporation will frequently make distributions that should be treated as a reduction of stock basis rather than as a taxable dividend. When this occurs, and the distributions are properly and timely reported on Schedules K-1, separate reporting under Sec. 6045B is not required.
The IRS requires taxpayers to file Form 8937 on or before 45 days following the organizational action or, if earlier, Jan. 15 of the year following the calendar year of the organizational action. For 2011 actions only, the IRS issued transitional relief by providing that no Form 8937 would be due earlier than Jan. 17, 2012 (because Jan. 15 was a Sunday and Jan. 16 was a holiday (Notice 2011-18)).
An essential element of the reporting requirement is that information that is filed with the IRS must also be provided to the shareholders. Although it was initially unclear whether a copy of the Form 8937 itself was required to be provided to shareholders, Notice 2012-11 clarifies that the dual requirements, i.e., to file with the IRS and to furnish information to shareholders, will be satisfied if the corporation posts the required information in a readily accessible format to an area of its primary public website and keeps the form accessible to the public on this website or the website of a successor organization for 10 years. Compliance with this alternative requirement makes it unnecessary to use Form 8937 at all or to file the form with the IRS.
Information required to be reported to the IRS and shareholders includes the issuer’s name, contact information, tax identification number, date of the action, classification and description of action, quantitative effects of the action, calculation of the change in the basis, data supporting the calculation, applicable Code section(s) or subsection(s) governing the action, and whether any resulting loss may be recognized.
Kevin Anderson is a partner, National Tax Services, with BDO USA LLP, in Bethesda, Md.
For additional information about these items, contact Mr. Anderson at 301-634-0222 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with BDO USA LLP.